What Kohl’s Can Do For ALDI

The announcement that Kohl’s would be pairing off with discount grocery retailer ALDI drew everyone’s attention — mostly because the news caught so many people by surprise.

In retrospect, perhaps the surprise in the pair-up should, in itself, be surprising, since anyone who’s been watching Kohl’s in the last 12-18 months knows the brand has been dedicated to remaking itself and being more solicitious of outside help.

Most eye-catching was the Amazon partnership, which offers Amazon shoppers a physical location where they can return their goods. The brand also tapped a new partnership with Under Armour and has begun shrinking its store footprint.

But a smaller physical footprint — with all the desirable side effects of helping the brand slim down its inventory and provide a more centered, curated shopping experience — creates a new issue: what do with the hundreds of stores the company has already built.

This is where discount grocer ALDI enters the story. Coming soon, the two brands will be test-driving groceries at up to 10 of Kohl’s department stores. The days where one can pick up eggs, milks, fruit, cargo shorts, socks and a record player are nearly upon us.

“The key priority we have as a company is to drive traffic,” Kevin Mansell, chief executive of Kohl’s, said in a Thursday earnings call. “We’re focused on traffic-driving retailers. Groceries, supermarket chains — they drive a lot of traffic. We’re finally on a path where we’re getting more [shoppers].”

The Grocery Fray

The issue for ALDI and Kohl’s in this: Supermarkets and grocery sales drive a lot of traffic (since everyone has to eat), but the segment has gotten heated as of late, with huge players like Walmart, Kroger and Amazon waging an all-out war to capture grocery spend. And while ALDI is not huge, its parent firm, German company Albrecht Discounts, is fairly large and is also the parent of the widely beloved Trader Joe’s brand.

Why Kohl’s wants ALDI is pretty clear.

“Groceries are one of the few things that most people buy routinely, which is why Amazon, Walmart and Target have been making big moves in this space,” said Stephanie Waters, global retail industry principal for SAP Hybris, told The Washington Post.

But selling groceries is hard, oftentimes with thin margins. Kohl’s wants the foot traffic grocery brings to add to the over 6.3 percent same-store traffic increases it saw during Q4. But that doesn’t mean it wants to try to break into the low-margin, highly competitive world of grocery.

But giving a competitive partner some floorspace to work with? That’s something the brand can do.

And ALDI is competitive, with 150 store openings last year along with a store count that over the last 15 years has grown to 1,750.

But Why Does ALDI Want Kohl’s?

Cost, as usual, plays a critical role. Taking up space at a Kohl’s location fits with ALDI’s natural inclination toward a smaller retail footprint, while freeing the brand from the usual stricture to custom-build it themselves.

And ALDI wants to grow and increase its name recognition, particularly in middle America, where they believe their discounting-oriented model will take root.

“Kohl’s is a cornerstone American retail brand,” an ALDI spokeswoman told PYMNTS. “We think that working with them is an ideal way to connect with the large base of American consumers.”

Kohl’s, which tends to embrace strip malls and smaller shopping centers rather than grounding itself in more traditional indoor malls, is “uniquely well-insulated and physically positioned” for customers looking for a mixed retail experience, the ALDI spokeswoman added.

The Era of Outside the Box

Kohl’s and ALDI shoppers share similar tastes: they look for a bargains on goods with decent quality but not necessarily name brand and aren’t averse to frequenting the occasional strip mall.

And they both like to think a bit out of the box.

“Some of the more radical steps, such as allowing Amazon returns [on Kohl’s part] in some stores and the introduction of Amazon shop-in-shops paid dividends,” Neil Saunders, managing director of GlobalData Retail, wrote in a note to clients. “This kind of thinking also shows that Kohl’s understands the need to give customers reasons to visit stores and is not afraid to experiment to achieve this.”